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Good products and bad companies

    In the past 15 years, smart digital ideas have captured the imagination, transformed habits and reshaped industries and economies.

    It may seem surprising, then, that so many great digital products in this generation come from bad companies.

    Spotify has reshaped music, but the company is still figuring out how to make consistent profits. Uber has changed cities and become a way of life for some drivers and drivers. The company has also spent far more money than it has brought in during its 13-year existence.

    App companies like DoorDash, Instacart, and Gopuff have hooked some Americans into delivering restaurant meals, groceries, or convenience items, but hardly any company that brings fresh food to our doors has made it financially viable. Robinhood has helped make investing accessible and fun, but it has made free stock trading unprofitable. Twitter is a cultural force, but it has never been a good business.

    There are some tech stars who are also (arguably) great companies, including Facebook, Airbnb, and Zoom Video. But how did so many companies with transformative technologies break the rule that a company dies if it can’t balance its checkbook?

    The optimistic view is that we want companies like Uber and Robinhood to have the time and money to sharpen their products, grab as many customers as possible, and later solve the money problems. And some of these digital stars are profitable depending on how you define “profit”.

    The sad thing is that we may be living in a technological mirage and the persistence of companies that should not survive has robbed us of real, lasting innovation. Let’s talk it out:

    maybe this is is what a revolution looks like.

    Last year, Uber spent nearly half a billion dollars more than it brought in — and that was a big improvement. If Uber was a family business, it would probably be long gone. The belief that technological disruption is just beginning, and investors’ hopes of making money from it, has kept Uber going.

    Supporters of the company say that Uber is preferably a leaky canoe. Expanding to many cities and countries at once instead of going slow, Uber capitalized on its popularity by expanding into a hub for transportation and delivering meals, groceries, drinks and other goods to our door.

    The hope is that this is step 1 on Uber’s journey to something bigger, better for everyone, and profitable. A similar transformation is happening at Spotify, which is trying to overcome the ugly math of music streaming by expanding into potentially lucrative podcasts. Instacart wants to change from an intermediary for delivering groceries to also selling software to supermarkets to manage their business. (Software is usually very profitable. Grocery delivery is not.)

    In many ways this is exactly what we should want. Because investors have believed in their business plans, companies with good ideas have the time and money to dream big, expand and figure out how to give customers what they want — and ultimately generate real profits.

    Amazon is a famous example of a company that in some of its early years spent more money than it brought in – a temporary state until it had both a good product and a great company. Until recent years, Netflix also had to keep borrowing money to keep its head above water. And some companies, including DoorDash and Spotify, are unprofitable under conventional accounting measures, but bring in more money than they spend.

    Or maybe hope has clouded common sense.

    The other possibility is that these digital ideas never made economic sense in the first place and were propped up by the misguided hopes of investors. In that regard, this generation of “Profits? What profit?” digital business is like a homeowner trying to enlarge a house with a rotten foundation.

    In the Margins newsletter, financial writer Ranjan Roy and his collaborator Can Duruk have repeatedly argued that the winning digital ideas of the past decade weren’t necessarily the brightest, but the ones with the most money to try (and keep trying).

    “If so much capital is focused on the wrong idea, we may never collectively find the right idea,” Roy told me. “It’s a perversion of capitalism.”

    What opportunities are we missing, Roy asked, to explore alternative restaurant delivery business models that might work better for diners, restaurant owners, couriers and delivery companies? Perhaps Uber has both burned a lot of other people’s money and wiped out the opportunity for other companies and governments to improve transportation. Rather than Spotify ingraining a rewards model that hasn’t worked for most musicians, alternative approaches may have thrived.

    Those companies, who have not found a way to make their products work financially, have become like a forest that has not been cleared of dead trees and undergrowth. New life does not have the oxygen to flourish.

    I find it disorienting that more than a decade into a profound period of digital change, it’s still unclear how the history books will reflect at this point. Are we at the dawn of lasting technological turbo adaptations to the world around us? Or has this all been a well-funded dream?

    • How Elon Musk Makes Business Decisions: The world’s richest person and soon-to-be owner of Twitter trades largely on “whim, fantasy, and the certainty that he’s 100 percent right,” my colleagues reported based on interviews with people who’ve worked with Musk.

    • Chinese censors can’t keep up: Bloomberg Businessweek writes that citizens’ online complaints about the Chinese government’s Covid-19 policies are overwhelming the legions of government censorship charged with removing critical messages from popular apps. (A subscription may be required.)

    • “You’re about to learn what a Twitter is.” A local TV news segment from the early days of Twitter explains this strange new online addiction. Twitter started in 2006, so this segment isn’t that long ago!

    Say hello to this surprisingly fast platypus.

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